Asymmetry and Rigidity in Farm‐Retail Price Transmission

Abstract

Abstract This article demonstrates how retail‐price transmission asymmetry can arise from intertemporal optimizing behavior among spatially competitive retailers facing concave spatial demand and shows that vigorous competition among retailers may not necessarily result in the larger retail‐price declines farmers expect during periods of declining farm prices. It also shows that, when this particular class of retailers incurs repricing costs, retail prices can be rigid over a range of upward and downward movements in the farm price. This suggests that the rigidity of retail prices, during periods of declining farm prices, could be due to repricing costs. It also suggests that the appropriate econometric model of price‐transmission is the model of friction, where Tobit analysis is the proper method of estimation rather than nonreversible functions.

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